How do rich people stay rich?

Summary

• What do rich people invest in?
• What are Alternate Investments?
• How is private equity different from public equity?
• How is a hedge fund different from a mutual fund?
• How is venture capital different from general private equity?
• Why do rich people invest in art?
• What do rich people do differently?
• Do rich people have access to opportunities I don't?
• What is a portfolio management service?

Managing money can be difficult, especially when you have a lot of it. Firstly, rich people realize it's important to have a budget & savings plan. Figuring out how much money you have coming in, and how much you have going out helps you prioritize your spending.

After that is sorted, they start investing based on their goals and risk tolerance.

What do rich people invest in?

Many wealthy individuals tend to adopt a long-term perspective when it comes to investing, as they have the financial resources and patience to deal with short-term losses.

Some wealthy individuals may look for undervalued assets (like a startup with a really good product or service) that have the potential to increase in value over time. This was basically what the famous show "Shark Tank" was all about.

Other wealthy individuals may follow a more traditional approach with a mix of stocks, bonds, real estate, and alternative assets such as hedge funds or private equity.

This is what an "Ultra High Net Worth" individual's portfolio looks like. Remember, this is a person whose 'net worth' (Total owned assets excluding any liabilities) is around 300 Crores.

The 4 main kinds of assets are -

• Equity
• Debt
• Real Estate
• Alternate Investments

What are Alternate Investments?

Alternate investments are usually divestment opportunities that aren't available on the public stock market. Traditional financial products like mutual funds, stocks and bonds don't come under this.

This is a list of alternative investments -

• Real estate
• Art & Collectibles
• Private Equity
• Hedge funds

How is private equity different from public equity?

1. Ownership: In a private company, the ownership is usually held by a small group of investors or the company's founders and is not listed on the stock market.
2. Liquidity: Private equity investments are harder to sell because there is no public market for them.
3. Transparency: Publicly traded companies are required to disclose financial information to the public. Private companies don't have to do this.
4. Regulation: Private companies have more flexibility with regulations, but this can also make them riskier for investors.
5. Potential returns: Private equity investments may offer the potential for higher returns due to their higher risk profile.

Private equity investors usually receive distributions throughout the life of their investment, but the risk involved is higher in these investments compared to public equity. This is why it's an investment preferred by sophisticated investors.

Over the years private equity has been getting riskier. The room for volatility has increased as you can see. There is a higher chance for lower returns than ever before when you invest in private equity. This is why private information guides these investments to generate higher returns.

Some private equity companies and their required minimum investment in India are -

• The Carlyle Group, $50 million
• Warbug Pincus, $50 million
• Bain Capital, $40 million
• Kotak Private Equity, $10 million
• Chrys Capital, $30 million

How is a hedge fund different from a mutual fund?

A hedge fund is a type of investment that is meant to help protect against losses. If a hedge fund thinks that the stock market is going to go down, it might invest in something like a bond instead.

In India according to SEBI regulations, hedge funds fall under Category 3 of AIF (Alternate Investment funds). The minimum investment is 1 Crore, therefore SEBI demands that the hedge fund managers should be worth crores even before starting the fund.

The five-year (2013-2017) average performance of hedge funds in India was better than the performance in many other countries. Indian hedge funds reported an average annualised return of 18%.

There are a few key differences between hedge funds and mutual funds:

1. Risk: Hedge funds are generally considered to be riskier as they use more complex and aggressive investment strategies.
2. Fees: Hedge funds typically charge higher fees.
3. Accessibility: Hedge funds are usually only available to accredited investors, which are individuals with a high net worth or income.
4. Regulation: Mutual funds are subject to stricter regulatory requirements, such as regular financial reporting and limits on the types of investments they can make.
5. Transparency: Hedge funds are not required to disclose financial information, which makes it harder for investors to understand the fund's investment strategies and risks.

How is venture capital different from general private equity?

Venture capital (VC) is a form of private equity that investors provide to startup companies that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks, and other financial institutions.

While some ventures can result in returns that are multiple times the original investment, many investments will end in a negative return. The National Bureau of Economic Research has stated that a 25% return on a venture capital investment is the average.

Why do rich people invest in art?

According to the attitude survey in Knight Frank’s Wealth Report 2022, India’s UNHWI allocated 11 per cent of their wealth to passion-led investments.

Passion-led investments include the purchase of assets such as jewellery, classic cars, or even luxury handbags whose value could potentially go up over a period of time.

Most bought art as an investment in the last year. Jewellery ranked second on the list of asset classes in which India’s rich invested followed by Classic Cars, Watches, and Luxury Handbags.

As the study above illustrates, investing in alternative investments is popular among UHNWI. This asset class is quite broad and includes -

• Real estate
• Commodities
• Paintings
• Classic cars
• Cryptocurrencies and more.

Many of these assets are illiquid with high transaction costs, so they are typically held for longer periods of time.

What do wealthy investors do differently?

Ultra-high-net-worth individuals (UHNWIs) are financially savvy and tend to focus on achieving their own goals rather than comparing themselves to others.

Many millionaires keep a lot of their money in cash or highly liquid cash equivalents. They establish an emergency account before ever starting to invest.

Two things they focus on are - learning & networking. These two skills help them look out for opportunities to invest and also sometimes finding the right time to invest in any kind of instrument be it a piece of art or startup.

These are the smart decisions weathly investors make -

• They diversify their investments geographically.
• They invest in private markets as well as public markets.
• They recognize assets and liabilities instantly.
• They have an investing strategy as well as a saving strategy.
• They rebalance their portfolio when required.
• They envision their goals and change their investment strategy accordingly.

Do wealthy people have access to exclusive opportunities that I don't?

The power of compounding is better when you have more wealth.

The jump from 1 crore to 4 crores in 10 years with 17% returns p.a. is much more significant than 1 lakh to 4 lakhs.

That's just compounding at a larger scale. Investors are armed with knowledge and choose investments that they are confident to give them better returns.

This combined with the fact they have better professional networks allowing them to recognize an investment opportunity before the rest of the public does. One such example is the best investment made by the profound Rakesh Jhunjhunwala -

Titan Company Ltd is the biggest investment in Rakesh Jhunjhunwala’s stock portfolio. The total value of Titan shares in his portfolio is worth a colossal Rs 11,189.2 crore as on August 2022. He first invested in the stock way back in 2002-03 when the share price was around Rs 3 to Rs 4. The stock is trading at Rs 2,492.90 as on August 16, 2022.

What is a Portfolio Management Service?

A portfolio management service is a professional organization responsible for making investment decisions and carrying out investment activities on behalf of vested individuals or institutions. The benefits are

• They take care of every part of managing your portfolio.
• They are aware of your return expectations and investment preferences.
• They keep an eye on the market and allocate your funds with your needs in mind.
• They tend to make decisions that are supposed to be good for their wealth.
• They give you advice about what you should do in the stock market.

The main difference between a PMS & a Mutual Fund Company is that a PMS has a minimum investment requirement of Rs. 50 Lakhs whereas a Mutual Fund SIP can start from as low as Rs. 100.

Important: There is a reason why the regulators have introduced a ₹50-lakh threshold for PMS — it's far riskier than Mutual Funds and other instruments. The regulatory bodies do not want small, gullible investors convinced into investing in PMS by smooth-talking wealth managers.

These are the selected five best PMS services in India in 2022 -

• Porinju Veliyath Equity Intelligence PMS
• Motilal Oswal Next Trillion-Dollar Opportunity PMS (NTDO)
• Kotak Pharma Fund
• ICICI Prudential PMS
• ValueQuest PMS

These services are expensive. But rebalancing your portfolio is a necessary expense. Stack is a wealth management service that manages and optimizes your investment portfolio for you. After a brief introduction your goals and risk appetite, our experts curate a portfolio that's ready to invest in. When you invest for the long term, for example, we rebalance your assets to optimize your growth based on the economic climate. The best part? We charge zero fees.